UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
OR
- --- TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ To ___________
Commission file number: 000-27997
Westborough Financial Services, Inc.
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-3504121
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 E. Main Street
Westborough, Massachusetts 01581
(508) 366-4111
(508) 616-9206
(Address of principal executive offices)
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.)
YES NO X
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Class Outstanding as of May 3, 2007
----- -----------------------------
Common Stock, par value $0.01 1,608,974
Transitional Small Business Disclosure Format (check one):
YES NO X
--- ---
Forward Looking Statements
Westborough Financial Services, Inc. (the "Company") and The Westborough
Bank (the "Bank") may from time to time make written or oral "forward-looking
statements" which may be identified by the use of such words as "may," "could,"
"should," "would," "believe," "anticipate," "estimate," "expect," "intend,"
"plan" and similar expressions that are intended to identify forward-looking
statements.
Forward-looking statements include statements with respect to the
Company's beliefs, plans, objectives, goals, expectations, anticipations,
estimates and intentions, which are subject to significant risks and
uncertainties. The following factors, many of which are subject to change based
on various other factors beyond the Company's control, and other factors
identified in the Company's filings with the Securities and Exchange Commission
and those presented elsewhere by management from time to time, could cause its
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements. Examples of forward-looking statements include, but are not limited
to, estimates with respect to our financial condition, results of operations
and business that are subject to various factors which would cause actual
results to differ materially from these estimates. These factors include, but
are not limited to:
* conditions which effect general and local economies;
* changes in interest rates, deposit flows, demand for mortgages and
other loans, real estate values and competition;
* changes in accounting principles, policies, or guidelines;
* changes in legislation or regulation; and
* other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing, products and
services.
This list of important factors is not exclusive. The Company and the Bank
do not undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by or on behalf of the Company or the
Bank.
WESTBOROUGH FINANCIAL SERVICES, INC.
AND SUBSIDIARY
INDEX
PART I: FINANCIAL INFORMATION........................................... 1
Item 1. Financial Statements............................................ 1
Consolidated Balance Sheets................................... 1
Consolidated Statements of Operations......................... 2
Consolidated Statements of Changes in Stockholders' Equity.... 3
Consolidated Statements of Cash Flows......................... 4
Notes to Unaudited Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis or Plan of Operation....... 8
Item 3. Controls and Procedures......................................... 18
PART II. OTHER INFORMATION.............................................. 19
Item 1. Legal Proceedings............................................... 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 19
Item 3. Defaults upon Senior Securities................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............. 19
Item 5. Other Information............................................... 19
Item 6. Exhibits......................... .............................. 19
SIGNATURES.............................................................. 20
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Westborough Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
March 31, September 30,
2007 2006
--------- -------------
(unaudited)
Assets
Cash and due from banks $ 3,205 $ 2,431
Federal funds sold 1,363 3,444
Short-term investments 10,513 2,442
-------- --------
Total cash and cash equivalents 15,081 8,317
Securities available for sale 51,911 62,442
Federal Home Loan Bank stock, at cost 3,421 3,376
Loans, net of allowance for loan losses of
$839 and $780, respectively 208,433 209,744
Premises and equipment, net 6,520 6,560
Accrued interest receivable 1,193 1,368
Deferred income taxes 1,355 1,268
Bank-owned life insurance 6,887 6,555
Other assets 1,490 1,337
-------- --------
Total assets $296,291 $300,967
======== ========
Liabilities and Stockholders' Equity
Deposits $210,898 $211,277
Long-term borrowings 53,500 57,500
Mortgagors' escrow accounts 373 380
Accrued expenses and other liabilities 3,792 3,427
-------- --------
Total liabilities 268,563 272,584
-------- --------
Commitments and Contingencies
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding 0 0
Common stock, $.01 par value, 5,000,000 shares
authorized, 1,608,974 and 1,595,774 issued and
outstanding, respectively 16 16
Additional paid-in capital 5,340 5,063
Retained earnings 23,123 24,289
Accumulated other comprehensive loss (441) (659)
Unearned compensation-RRP (4,729 and 4,729 shares,
respectively) (82) (83)
Unearned compensation-ESOP (22,834 and 24,308
shares, respectively) (228) (243)
-------- --------
Total stockholders' equity 27,728 28,383
-------- --------
Total liabilities and stockholders' equity $296,291 $300,967
======== ========
See accompanying notes to unaudited consolidated financial statements
1
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Operations
(Dollars in thousands, except share data)
Three-Months Ended Six-Months Ended
March 31, March 31,
----------------------- -----------------------
2007 2006 2007 2006
---- ---- ---- ----
(unaudited) (unaudited)
Interest and dividend income:
Interest and fees on loans $ 3,075 $ 2,859 $ 6,059 $ 5,662
Interest and dividends on investment securities 644 693 1,308 1,331
Interest on federal funds sold 18 15 32 30
Interest on short-term investments 108 17 155 50
--------- --------- --------- ---------
Total interest and dividend income 3,845 3,584 7,554 7,073
--------- --------- --------- ---------
Interest expense:
Interest on deposits 1,413 1,123 2,768 2,099
Interest on Federal Home Loan Bank advances 660 553 1,313 1,097
--------- --------- --------- ---------
Total interest expense 2,073 1,676 4,081 3,196
--------- --------- --------- ---------
Net interest income 1,772 1,908 3,473 3,877
Provision for loan losses 30 0 60 0
--------- --------- --------- ---------
Net interest income, after provision for loan losses 1,742 1,908 3,413 3,877
--------- --------- --------- ---------
Other income:
Customer service fees 174 186 338 381
Gain on sales of securities available for sale, net 3 0 4 0
Loss on sales of mortgages 0 (25) 0 (25)
Miscellaneous 41 70 153 131
--------- --------- --------- ---------
Total other income 218 231 495 487
--------- --------- --------- ---------
Operating expenses:
Salaries and employee benefits 1,549 1,234 2,962 2,399
Occupancy and equipment 290 331 553 601
Data processing 195 187 386 377
Marketing and advertising 35 36 72 79
Professional fees 266 156 568 272
Other general and administrative 313 492 600 819
--------- --------- --------- ---------
Total operating expenses 2,648 2,436 5,141 4,547
--------- --------- --------- ---------
Loss before benefit for income taxes (688) (297) (1,233) (183)
Benefit for income taxes (173) (99) (259) (73)
--------- --------- --------- ---------
Net loss $ (515) $ (198) $ (974) $ (110)
========= ========= ========= =========
Number of weighted average shares outstanding-Basic 1,581,042 1,561,515 1,573,616 1,560,746
Loss per share-Basic $ (0.33) $ (0.13) $ (0.62) $ (0.07)
Number of weighted average shares outstanding-Dilutive 1,581,042 1,561,515 1,573,616 1,560,746
Loss per share-Dilutive $ (0.33) $ (0.13) $ (0.62) $ (0.07)
See accompanying notes to unaudited consolidated financial statements.
2
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
(unaudited)
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Compensation- Compensation-
Stock Capital Earnings Income (Loss) RRP ESOP Total
------ ---------- -------- ------------- ------------- ------------- -------
Balance at September 30, 2005 $16 $4,990 $24,714 $ (714) $(130) $(273) $28,603
-------
Comprehensive loss:
Net loss 0 0 (110) 0 0 0 (110)
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 (307) 0 0 (307)
-------
Total comprehensive loss (417)
-------
Cash dividends declared and paid ($.12 per share) 0 0 (191) 0 0 0 (191)
ESOP shares released and committed
to be released (1,474 shares) 0 25 0 0 0 16 41
Amortization of RRP stock 0 0 0 0 39 0 39
Issuance of common stock under stock option
plan, net of income tax benefits ($5) 0 15 0 0 0 0 15
--- ------ ------- ------- ---- ----- -------
Balance at March 31, 2006 $16 $5,030 $24,413 $(1,021) $(91) $(257) $28,090
=== ====== ======= ======= ==== ===== =======
Balance at September 30, 2006 $16 $5,063 $24,289 $ (659) $(83) $(243) $28,383
-------
Comprehensive loss:
Net loss 0 0 (974) 0 0 0 (974)
Change in net unrealized loss on
securities available for sale, net of
reclassification adjustment and tax effects 0 0 0 218 0 0 218
-------
Total comprehensive loss (756)
-------
Cash dividends declared and paid ($.12 per share) 0 0 (192) 0 0 0 (192)
ESOP shares released and committed
to be released (1,474 shares) 0 34 0 0 0 15 49
Amortization of RRP stock 0 0 0 0 1 0 1
Issuance of common stock under stock option
plan, net of income tax benefits ($107) 0 243 0 0 0 0 243
--- ------ ------- ------- ---- ----- -------
Balance at March 31, 2007 $16 $5,340 $23,123 $ (441) $(82) $(228) $27,728
=== ====== ======= ======= ==== ===== =======
See accompanying notes to unaudited consolidated financial statements.
3
Westborough Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Six-Months Ended
March 31,
------------------
2007 2006
---------- -------
(unaudited)
Cash flows from operating activities:
Net loss $ (974) $ (110)
Adjustments to reconcile net loss to net cash
used by operating activities:
Provision for loan losses 60 -
Net amortization of securities 34 145
Amortization of net deferred loan costs and premiums
(discounts) on purchased loans and indirect lendi 26 35
Depreciation expense 230 237
Loss on the sales of mortgages - 25
Gain on sales and calls of securities, net (4) -
Decrease (increase) in accrued interest receivable 175 (157)
Deferred income tax benefit (204) (87)
ESOP shares released and committed to be released 49 41
Amortization of RRP stock 1 39
Increase in bank-owned life insurance (128) (107)
Other, net 212 (322)
-------------------
Net cash used by operating activities (523) (261)
-------------------
Cash flows from investing activities:
Activity in available-for-sale securities:
Sales and calls 4,500 -
Maturities 9,365 6,350
Purchases (5,037) (10,580)
Principal payments 2,008 2,559
Purchase of Federal Home Loan Bank stock (45) (197)
Proceeds from the sale of loans 55 1,707
Loan originations, net 1,170 (10,349)
Purchase of banking premises and equipment, net (190) (564)
Premiums paid on bank-owned life insurance (204) (204)
-------------------
Net cash provided (used) by investing activities 11,622 (11,278)
-------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (379) 11,078
Net decrease in short-term borrowings - (4,000)
Proceeds from Federal Home Loan Bank advances - 3,500
Repayment of Federal Home Loan Bank advances (4,000) -
Net decrease in mortgagors' escrow accounts (7) (29)
Issuance of common stock under stock option plan,
net of tax benefits 243 15
Dividends paid (192) (191)
-------------------
Net cash (used) provided by financing activities (4,335) 10,373
-------------------
Net change in cash and cash equivalents 6,764 (1,166)
Cash and cash equivalents at beginning of year 8,317 8,974
-------------------
Cash and cash equivalents at end of period $15,081 $ 7,808
===================
4
Westborough Financial Services, Inc. and Subsidiary
Notes to Unaudited Consolidated Financial Statements
1) Basis of Presentation and Consolidation.
The unaudited consolidated interim financial statements of Westborough
Financial Services, Inc. and Subsidiary (the "Company") presented herein should
be read in conjunction with the consolidated financial statements for the year
ended September 30, 2006, included in the Annual Report on Form 10-KSB of the
Company, the holding company for The Westborough Bank (the "Bank").
The unaudited consolidated interim financial statements herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and with
the instructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete consolidated financial statements. In the opinion of management, the
consolidated interim financial statements reflect all adjustments (consisting
solely of normal recurring accruals) necessary for a fair presentation of such
information. Interim results are not necessarily indicative of results to be
expected for the entire year. A summary of significant accounting policies
followed by the Company is set forth in the Notes to Consolidated Financial
Statements of the Company's 2006 Annual Report on Form 10-K/A.
2) Commitments and Contingencies.
At March 31, 2007, the Bank had residential and commercial loan
commitments to borrowers of $10.7 million, commitments for home equity lines of
$350 thousand, available home equity lines of credit of $15.4 million,
unadvanced funds on commercial lines of credit, overdrafts and participation
loans of $4.5 million, unadvanced funds on construction mortgages of $2.5
million and personal overdraft lines of credit of approximately $488 thousand.
The Company had no commitments to purchase or sell securities at March 31,
2007.
3) Earnings per Share and Stock Based Compensation.
Basic earnings per share represent income available to common
stockholders divided by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128
and reflects additional common shares (common stock equivalents) that would
have been outstanding if only dilutive potential common shares had been issued,
as well as any adjustment to income that would result from the assumed
issuance. For the three and six months ended March 31, 2007 and 2006, the
Company has 17,090 and 27,500 outstanding stock option shares that are
considered anti-dilutive as the Company had recorded a net loss for the
respective periods. The Company has excluded from the diluted earnings per
share calculation any potential common shares that would decrease loss per
share. Potential common shares that may be issued by the Company relate solely
to outstanding stock options and grants and are determined using the treasury
stock method.
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004),
Share-Based Payment ("SFAS 123(R)" or the "Statement"). SFAS 123(R) requires
that the compensation cost relating to share-based payment transactions,
including grants of employee stock options, be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. SFAS 123(R) covers a wide range of share-based
compensation arrangements including stock options, restricted share plans,
performance-based awards, share appreciation rights, and employee share
purchase plans. SFAS 123(R) is a replacement of FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretive
guidance. The effect of the Statement will be to require entities to
5
measure the cost of employee services received in exchange for stock options
based on the grant-date fair value of the award, and to recognize the cost over
the period the employee is required to provide services for the award. SFAS
123(R) permits entities to use any option-pricing model that meets the fair
value objective in the Statement.
The Company adopted SFAS 123(R) on October 1, 2006 using the modified
prospective transition method. Under the modified prospective transition
method, the Company uses the fair value based accounting method for all
employee awards granted, modified, or settled after September 30, 2006. As of
October 1, 2006, compensation cost related to the non-vested portion of awards
outstanding as of September 30, 2006 are based on the grant-date fair value of
those awards as calculated under the original provisions of Statement No. 123;
that is, the Company did not re-measure the grant-date fair value estimate of
the unvested portion of awards granted prior to the effective date of SFAS
123(R). The implementation of SFAS 123(R) was not material.
On January 25, 2001, the Company's stockholders approved the Westborough
Financial Services, Inc. 2001 Stock Option Plan (the "Stock Option Plan").
Under the Stock Option Plan, the Company may grant options to its directors,
officers and employees for up to 55,348 shares of common stock. Both incentive
stock options and non-qualified stock options may be granted under the Stock
Option Plan. The exercise price of each option equals the market price of the
Company's stock on the date of grant and an option's maximum term is ten years.
Options generally vest over a five-year period.
Prior to October 1, 2006, the Company applied APB Opinion 25 and related
Interpretations in accounting for the Stock Option Plan. Accordingly, no
compensation cost had been recognized. Had compensation cost for the Company's
Stock Option Plan been determined based on the fair value at the grant dates
for awards under the plan consistent with the method prescribed by SFAS No.
123, the Company's net loss and earnings per share would have been adjusted to
the pro forma amounts indicated below:
Three Months Ended Six Months Ended
March 31, 2006 March 31, 2006
------------------ ----------------
Net loss As reported $(198) $(110)
Pro forma $(199) $(112)
Basic loss per share As reported $(0.13) $(0.07)
Pro forma $(0.13) $(0.07)
Diluted loss per share As reported $(0.13) $(0.07)
Pro forma $(0.13) $(0.07)
6
4) Pension Plan
The Bank provides pension benefits for eligible employees through a
defined benefit pension plan. Substantially all employees participate in the
retirement plan on a non-contributing basis, and are fully vested after three
years of service.
The components of net periodic pension cost are as follows:
(Dollars in thousands) Three-months ended March 31, Six-months ended March 31,
---------------------------- --------------------------
2007 2006 2007 2006
---------------------------- --------------------------
Service cost $ 60 $ 54 $ 119 $ 107
Interest cost 44 43 87 88
Expected return on assets (58) (54) (115) (108)
Transition obligation 1 1 2 1
Actuarial gain (4) (2) (8) (4)
---------------------------- --------------------------
$ 43 $ 42 $ 85 $ 84
===========================- ==========================
5) Recent accounting pronouncements
On February 15, 2007, the Financial Accounting Standards Board issued
Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, which provides companies with an option to report selected
financial assets and liabilities at fair value. Statement No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. This Statement is effective for the
Company's 2009 fiscal year, with early adoption permitted for the Company's
2008 fiscal year, provided that the Company also adopts Statement No. 157 for
fiscal 2008. Management is currently evaluating the potential impacts of
adopting this Statement on its consolidated financial statements.
7
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
The following discussion compares the financial condition of the Company
and its wholly-owned subsidiary, the Bank, at March 31, 2007 and September 30,
2006, and the results of operations for three and six-months ended March 31,
2007, compared to the same periods in 2006. This discussion and analysis should
be read in conjunction with the unaudited consolidated financial statements and
related notes that are included within this report.
The Company's principal business is its investment in the Bank, which is
a community-oriented financial institution providing a variety of financial
services to the communities which it serves. The business of the Bank consists
of attracting deposits from the general public or borrowing funds and using
these funds to originate various types of loans primarily in the towns of
Westborough, Northborough and Shrewsbury, Massachusetts, including residential
and commercial real estate mortgage loans and, to a lesser extent, consumer and
commercial loans.
The Bank's results of operations depend primarily on net interest income.
Net interest income is the difference between the interest income the Bank
earns on its interest-earning assets and the interest it pays on its
interest-bearing liabilities. Interest-earning assets primarily consist of
mortgage loans and investment securities. Interest-bearing liabilities consist
primarily of certificates of deposit, savings accounts and borrowings. The
Bank's results of operations are also affected by its provision for loan
losses, income from security and mortgage transactions, income from the sale of
non-deposit investment products, other income and operating expenses. Operating
expenses consist primarily of salaries and employee benefits, occupancy, data
processing, marketing, professional fees and other general and administrative
expenses. Other income consists mainly of customer service fees and charges,
income from bank-owned life insurance and fees from the sale of non-insured
investment products.
The Bank's results of operations may also be affected significantly by
litigation expenses and general and local economic and competitive conditions,
particularly those with respect to changes in market interest rates, government
policies and actions of regulatory authorities. Future changes in applicable
law, regulations or government policies may materially impact the Bank.
Additionally, the Bank's lending activity is concentrated in loans secured by
real estate located in Westborough, Northborough and Shrewsbury, Massachusetts.
Accordingly, the Bank's results of operations are affected by regional market
and economic conditions.
8
Comparison of Financial Condition at March 31, 2007 and September 30, 2006
The Company's total assets decreased by $4.7 million, or 1.6%, to $296.3
million at March 31, 2007 from $301.0 million at September 30, 2006, primarily
as a result of a decrease in securities available for sale and net loans,
offset to a lesser extent by an increase in short-term investments. Securities
available for sale decreased by $10.5 million, or 16.9%, to $51.9 millions from
$62.4 million, primarily due to calls and maturities of government-sponsored
obligations and regularly scheduled payments on mortgage-backed securities. As
a result, short-term investments increased by $8.1 million at March 31, 2007 as
the Company works to reinvest the cash inflows over the next quarter.
Additionally, net loans decreased by $1.3 million to $208.4 million at March
31, 2007 from $209.7 million at September 30, 2006. Within the loan portfolio,
commercial loans increased by $3.6 million from September 30, 2006 to March 31,
2007 and residential real estate and home equity lines-of-credit decreased by
$5.3 million for the same period. Deposits decreased by $379 thousand to $210.9
million at March 31, 2007 from $211.3 million at September 30, 2006, primarily
in regular savings, twelve-months or longer-term certificates of deposit and
business checking accounts. Additionally, Federal Home Loan Bank ("FHLB")
advances decreased by $4.0 million, or 7.0%. to $53.5 million at March 31, 2007
from $57.5 million at September 30, 2006. Total stockholders' equity declined
by $656 thousand, to $27.7 million at March 31, 2007 from $28.4 million at
September 30, 2006 primarily as a result of the net period loss of $974
thousand and the payment of $192 thousand in dividends to shareholders.
However, it was partially offset by $243 thousand from the exercise of stock
options and a $218 thousand increase in the after-tax market value of
securities available for sale. The Company's securities consist primarily of
interest-rate sensitive securities whose market value changes inversely with
changes in market interest rates. At March 31, 2007, deferred income tax
benefits associated with this market value decline were approximately $223
thousand.
Comparison of Operating Results for Three-Months Ended March 31, 2007 and 2006
Net Loss: The Company reported a loss per share (dilutive) for
three-months ended March 31, 2007 of $0.33 on a net loss of $515 thousand, as
compared to a loss per share (dilutive) of $0.13 on a net loss of $198 thousand
for three-months ended March 31, 2006. The Company's return on average assets
was a negative 0.69% for three-months ended March 31, 2007 as compared to a
negative 0.26% for three-months ended March 31, 2006.
The increase in net loss for three-months ended March 31, 2007 was primarily due
to a decrease in net interest income and an increase in operating expenses. The
Bank's net interest income declined by $136 thousand, or 7.1%, to $1.8 million
for three-months ended March 31, 2007 as compared to $1.9 million for
three-months ended March 31, 2006, as the Bank continues to experience the
effects of a flat to inverted yield curve. As a result, the net interest rate
spread, which represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing liabilities,
declined by 0.22%, to 2.17% for three-months ended March 31, 2007 as compared to
2.39% for three-months ended March 31, 2006. Primarily due to an increase in the
rate of interest earned on short-term investments, investment securities and
commercial loans, the yield on average interest-earning assets increased by
0.46%, to 5.55% for three-months ended March 31, 2007 from 5.09% for
three-months ended March 31, 2006. However, the cost of average interest-bearing
liabilities increased by 0.67%, to 3.38% for three-months ended March 31, 2007
from 2.71% for three-months ended March 31, 2006 and primarily reflects higher
interest rates paid on certificate of deposit accounts and Federal Home Loan
Bank advances. The yield curve challenged the Bank by limiting investment
opportunities and returns. Compression of the net interest rate spread can be
expected to result in lower net interest income and continued operating losses,
until such time as the yield curve returns to a more normal, upward slope.
Operating expenses increased by $212 thousand, or 8.7%, to $2.6 million for
three-months ended March 31, 2007 as compared to $2.4 million for three-months
ended March 31, 2006. The increase was primarily due to increases in
professional fees and other operating expenses related to the merger with
Assabet Valley Bancorp ("Assabet"). These increases were partially offset by
decreased occupancy and equipment and general
9
and administrative expenses. The Bank recorded a $30 thousand provision for loan
losses for three-months ended March 31, 2007 as compared to no provision for
loan losses for three-months ended March 31, 2006.
The following schedule of the Bank's net interest rate spread and net
interest margin for the periods indicated is based upon average balances and
will aid in the subsequent discussion of interest and dividend income, interest
expense and net interest income:
---------------------------------------
Three-Months Ended
March 31,
---------------------- Increase
2007 2006 (decrease)(7)
---------------------------------------
Interest-earning assets:
Short-term investments (1) 5.37% 4.92% 0.45%
Investment securities (2) 4.50% 4.02% 0.48%
Loans (3) 5.85% 5.45% 0.40%
Total interest-earning assets 5.55% 5.09% 0.46%
Interest-bearing liabilities:
NOW accounts 0.60% 0.14% 0.46%
Savings accounts (4) 1.17% 1.32% -0.15%
Money market deposit accounts 2.98% 3.32% -0.34%
Certificate of deposit accounts 4.63% 3.64% 0.99%
Total interest-bearing deposits 3.02% 2.31% 0.71%
Borrowed funds 4.55% 4.13% 0.42%
Total interest-bearing liabilities 3.38% 2.71% 0.67%
Net interest rate spread (5)(7) 2.17% 2.39% -0.22%
Net interest margin (6) 2.56% 2.71% -0.15%
(1) Short-term investments include federal funds sold.
(2) All investment securities are considered available for sale.
(3) Loans are net of deferred loan origination costs (fees), allowance for
loan losses, discount/premium on purchased loans and unadvanced funds.
(4) Savings accounts include the balance in mortgagors' escrow accounts.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(7) Columns and rows may not add do to small rounding variances.
10
Interest and Dividend Income: Interest and dividend income increased by
$261 thousand, or 7.3%, to $3.8 million for three-months ended March 31, 2007
from $3.6 million for March 31, 2006. The increase was due to higher rates
earned on average interest-earning assets. The average volume of
interest-earning assets for three-months ended March 31, 2007 decreased to
$277.0 million as compared to an average volume of $281.3 million for
three-months ended March 31, 2006. The Bank's average interest rate earned on
all interest-earning assets increased by 0.46%, to 5.55% for three-months ended
March 31, 2007 from 5.09% for three-months ended March 31, 2006. The decrease
in the average volume of interest-earning assets was primarily used to pay-down
borrowings from the FHLB and to cover a slight decline in deposit accounts. The
average balance of investment securities for three-months ended March 31, 2007
decreased to $57.3 million, earning 4.50% as compared to an average balance of
$68.9 million, earning 4.02% for three-months ending March 31, 2006. The
average balance of short-term investments for three-months ended March 31, 2007
increased to $9.3 million earning 5.37% as compared to an average balance of
$2.6 million earning 4.92% for three-months ending March 31, 2006. The higher
yield reflects increases in short-term rates by the Federal Open Market
Committee (" FOMC"). The average balance of loans for three-months ended March
31, 2007, increased slightly to $210.3 million earning 5.85%, as compared to an
average balance of $209.9 million earning 5.45% for three-months ending March
31, 2006.
Interest Expense: Total interest expense increased by $397 thousand, or
23.7%, to $2.1 million for three-months ended March 31, 2007 from $1.7 million
for three-months ended March 31, 2006. The increase in interest expense was due
to a combination of higher volumes of money market deposit accounts,
certificates of deposits, and borrowings from the FHLB and an increase in the
average rate of interest paid on certificates of deposit, NOW accounts and
borrowings from the FHLB. The average volume of all interest-bearing
liabilities (which includes interest-bearing deposits and borrowings) decreased
to $245.3 million, with a cost of 3.38%, for three-months ended March 31, 2007
as compared to $247.8 million, with a cost of 2.71%, for three-months ending
March 31, 2006. The average volume of interest-bearing deposits decreased to
$187.3 million, with a cost of 3.02%, for three-months ended March 31, 2007 as
compared to an average balance of $194.2 million, with a cost of 2.31%, for
three-months ended March 31, 2006. Within the category of interest-bearing
deposits, the average balance of money market deposit accounts and certificate
of deposit accounts increased by $7.2 million and $15.8 million, respectively,
while the average balance of savings and NOW accounts declined by $26.7 million
and $3.2 million, respectively. The decrease in savings and NOW accounts was
due to the relative attractiveness of and transfers to certificate of deposit
accounts, money market accounts and alternative investments in the marketplace.
During this period, the Bank has utilized alternative sources of funds by
increasing its borrowing from the FHLB. The average balance of borrowings
increased to $58.0 million, with an average cost of 4.55%, for three-months
ended March 31, 2007, as compared to an average balance of $53.7 million, with
an average cost of 4.13%, for three-months ended March 31, 2006. The increase
in average borrowing from the FHLB primarily funded the decline in average
balances of interest-bearing liabilities.
Net Interest Income: Net interest income decreased by $136 thousand, or
7.1%, for three-months ended March 31, 2007, to $1.8 million compared to $1.9
million for three-months ended March 31, 2006. The decrease was attributed to
the combination of an increase in interest expense of $397 thousand, offset, to
a lesser extent, by an increase in interest and dividend income of $261
thousand. The Bank's net interest rate spread, which represents the difference
between the weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities, declined by 0.22% to 2.17% for
three-months ended March 31, 2007 as compared to 2.39% for three-months ended
March 31, 2006.
Provision for Loan Losses: The Bank recorded a $30 thousand provision for
loan losses for three-months ended March 31, 2007 compared to $0 for
three-months ended March 31, 2006. The increase in the provision for loan losses
is due to an increase in the valuation allowances on commercial loans, as the
balance increased by $450 thousand to $39.0 million for three-months ended March
31, 2007, as well as an increase in the allowance for specific problem loans.
11
Total loans at March 31, 2007 were $208.4 million, $209.7 million at September
30, 2006 and $221.4 million at March 31, 2006. It is the Bank's policy to
provide valuation allowances for probable losses on loans based upon past loss
experience, current trends in the level of delinquent and specific problem
loans, loan concentrations to single borrowers, adverse situations that may
affect the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions in our market area. Accordingly, the
evaluation of the adequacy of the allowance for loan losses is not based
directly on the level of non-performing loans. As the Bank expands its
commercial lending activities, management believes that growth in the allowance
for loan losses may be likely. Additionally, while management believes it
continues to have excellent loan quality, the Bank recognizes that it is located
in a market and geographic area that is considered to be in the high technology
and financial services belt and, most likely, the Bank's allowance for loan loss
will reflect the relative health of these economic sectors. While management
believes it's current level of allowance for loan losses is adequate, there can
be no assurance that the allowance will be sufficient to cover loan losses or
that future adjustments to the allowance will not be necessary if economic
and/or other conditions differ substantially from the economic and other
conditions considered by management in evaluating the adequacy of the current
level of the allowance for loan losses.
Other Income: Other income consists primarily of fee income for customer
services, gains and losses from the sale of mortgages and the sale of
securities available for sale, and income from bank-owned life insurance
("BOLI"). Total other income declined by $13 thousand, or 5.6%, to $218
thousand for three-months ended March 31, 2007, from $231 thousand for
three-months ended March 31, 2006. Miscellaneous income decreased by $29
thousand, or 41.4%, to $41 thousand for three-months ended March 31, 2007, from
$70 thousand for three-months ended March 31, 2006, primarily from an decrease
in mortgage servicing income recognized upon the sale of mortgages in the
secondary market and a decrease in income on BOLI. Income from customer service
fees decreased by $12 thousand, or 6.5%, to $174 thousand for three-months
ended March 31, 2007 as compared to $186 thousand for three-months ended March
31, 2006, primarily due to the timing of fees associated with the sale of
non-deposit investment products and a slight decrease in ATM usage fees. During
three-months ended March 31, 2007, there were no sales of fixed-rate mortgage
loans, with servicing retained by the Bank, as compared to a pre-tax loss of
$25 thousand, for three-months ended March 31, 2006.
Operating Expenses: Three-months ended March 31, 2007 operating expenses
increased by $212 thousand, or 8.7%, to $2.6 million, compared to $2.4 million
for three-months ended March 31, 2006. Operating expenses as a percent of
average assets were 3.56% for three-months ended March 31, 2007 as compared to
3.23% for three-months ended March 31, 2006. The primary reasons for the
increase in operating expenses were due to professional and other operating
expenses associated with the pending merger with Assabet, offset to a lesser
extent by a decrease in other general and administrative expenses. Salaries and
employee benefits increased by $315 thousand, or 25.5% to $1.5 million for
three-months ended March 31, 2007 resulting from an accelerated recognition of
certain director benefit expenses. Professional fees increased by $110 thousand
to $266 thousand for three-months ended March 31, 2007 from $156 thousand for
three-months ended March 31, 2006, primarily due to legal and other expenses
related to the proposed merger with Assabet. Other general and administrative
decreased by $179 thousand, or 36.4%, to $313 thousand for three-months ended
March 31, 2007 as compared to $492 thousand for three-months ended March 31,
2006, due to the timing of settlement expenses relating to a civil action filed
against the Bank in 2006. Occupancy and equipment expenses declined by $41
thousand, or 12.4%, to $290 thousand for three-months ended March 31, 2007 as
compared to $331 thousand for three-months ended March 31, 2006, due to a
reduction in maintenance expenses coupled with a decline in depreciation expense
on equipment, still in operation, reaching their estimated useful life.
12
Income Taxes: Loss before benefit for income taxes increased by $391
thousand, to a loss of $688 thousand for three-months ended March 31, 2007 as
compared to a loss of $297 thousand for three-months ended March 31, 2006.
Primarily a result of this increased loss, the benefit for income taxes
increased by $74 thousand, to a benefit of $173 thousand, for three-months
ended March 31, 2007 as compared to a benefit of $99 thousand for three-months
ended March 31, 2006. The effective income tax rate was (25.4%) and (33.3%) for
three-months ended March 31, 2007 and three-months ended March 31, 2006,
respectively. The lower effective tax rate was attributable to the loss before
income taxes for three-months ended March 31, 2007, as compared to March 31,
2006, in addition to the Bank's utilization of a wholly-owned security
investment subsidiary, and favorable tax treatment from the increase in the
cash surrender value of BOLI.
Comparison of Operating Results for Six-Months Ended March 31, 2007 and 2006
Net Loss: The Company reported a loss per share (dilutive) for six-months
ended March 31, 2007 of $0.62 on a net loss of $974 thousand, as compared to a
loss per share (dilutive) of $0.07 on a net loss of $110 thousand for
six-months ended March 31, 2006. The Company's return on average assets was
negative 0.65% for six-months ended March 31, 2007 as compared to negative
0.07% for six-months ended March 31, 2006.
The increased net loss for six-months ended March 31, 2007 was due
primarily to a decrease in net interest income and an increase in operating
expenses. Net interest income decreased by $404 thousand, or 10.4%, to $3.5
million, for six-months ended March 31, 2007, as compared to $3.9 million for
six-months ended March 31, 2006, as the Bank continues to experience the effects
of a flat to inverted yield curve, where short-term interest rates were higher
than longer-term interest rates. The net interest rate spread declined by 0.34%,
to 2.11% for six-months ended March 31, 2007 as compared to 2.45% for six-months
ended March 31, 2006. Primarily due to an increase in the rate of interest
earned on short-term investments, investment securities and commercial loans,
the yield on average interest-earning assets increased by 0.38%, to 5.44% for
six-months ended March 31, 2007 from 5.06% for six-months ended March 31, 2006.
However, the cost of average interest-bearing liabilities increased by 0.72%, to
3.33% for six-months ended March 31, 2007 from 2.61% for six-months ended March
31, 2006 and primarily reflects higher interest rates paid on certificate of
deposit accounts and FHLB advances. For six-months ended March 31, 2007,
operating expenses increased by $594 thousand, or 13.1%, to $5.1 million, from
$4.5 million for six-months ended March 31, 2006. The primary reasons for the
increase in operating expenses were due to increased professional fees and other
operating expenses related to the pending merger with Assabet, offset to a
lesser extent by a decline in general and administrative, occupancy and
equipment and marketing expenses. The Bank recorded a $60 thousand provision for
loan losses for six-months ended March 31, 2007 as compared to no provision for
loan losses for six-months ended March 31, 2006.
13
The following schedule of the Bank's net interest rate spread and net
interest margin for the periods indicated is based upon average balances and
will aid in the subsequent discussion of interest and dividend income, interest
expense and net interest income:
---------------------------------------
Six-Months Ended
March 31,
---------------------- Increase
2007 2006 (decrease)(7)
---------------------------------------
Interest-earning assets:
Short-term investments (1) 4.88% 4.44% 0.44%
Investment securities (2) 4.35% 3.90% 0.45%
Loans (3) 5.77% 5.45% 0.32%
Total interest-earning assets 5.44% 5.06% 0.38%
Interest-bearing liabilities:
NOW accounts 0.43% 0.14% 0.29%
Savings accounts (4) 1.23% 1.38% -0.15%
Money market deposit accounts 3.16% 3.30% -0.14%
Certificate of deposit accounts 4.56% 3.48% 1.08%
Total interest-bearing deposits 2.96% 2.19% 0.77%
Borrowed funds 4.55% 4.14% 0.41%
Total interest-bearing liabilities 3.33% 2.61% 0.72%
Net interest rate spread (5)(7) 2.11% 2.45% -0.34%
Net interest margin (6) 2.50% 2.77% -0.27%
(1) Short-term investments include federal funds sold.
(2) All investment securities are considered available for sale.
(3) Loans are net of deferred loan origination costs (fees), allowance for
loan losses, discount/premium on purchased loans and unadvanced funds.
(4) Savings accounts include the balance in mortgagors' escrow accounts.
(5) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
(7) Columns and rows may not add do to small rounding variances.
14
Interest and Dividend Income: Interest and dividend income increased by
$481 thousand, or 6.8%, to $7.6 million for six-months ended March 31, 2007 as
compared to $7.1 million for six-months ended March 31, 2006. Primarily due to
an increase in the rate of interest earned on loans and investment securities,
the yield on interest-earning assets increased by 0.38% to 5.44% for six-months
ended March 31, 2007 from 5.06% for six-months ended March 31, 2006. The
average volume of interest-earning assets for six-months ended March 31, 2007
decreased to $277.7 million as compared to an average volume of $279.6 million
for six-months ended March 31, 2006. These funds were primarily used to fund
deposit reductions. The average balance of loans for six-months ended March 31,
2007, increased to $210.0 million earning 5.77%, as compared to an average
balance of $207.7 million earning 5.45% for six-months ending March 31, 2006.
The average balance of short-term investments for six-months ended March 31,
2007 increased to $7.7 million earning 4.88% as compared to an average balance
of $3.6 million earning 4.44% for six-months ending March 31, 2006. The higher
yield reflects increases in short-term rates by the FOMC. The average balance
of investment securities for six-months ended March 31, 2007 decreased to $60.1
million, earning 4.35% as compared to an average balance of $68.3 million,
earning 3.90% for six-months ending March 31, 2006. The decline was used
primarily to fund a decrease in deposits.
Interest Expense: Total interest expense increased by $885 thousand, or
27.7%, to $4.1 million for six-months ended March 31, 2007, from $3.2 million
for six-months ended March 31, 2006. The increase in interest expense was due
to a combination of higher volumes of money market deposit accounts,
certificates of deposits, and borrowings from the FHLB and an increase in the
average rate of interest paid on certificates of deposit and borrowings from
the FHLB. The average volume of all interest-bearing liabilities increased to
$244.9 million, with a cost of 3.33%, for six-months ended March 31, 2007 as
compared to $244.6 million, with a cost of 2.61%, for six-months ending March
31, 2006. Within this category of interest-bearing liabilities, the average
volume of interest-bearing deposits decreased to $187.3 million, with a cost of
2.96%, for six-months ended March 31, 2007 as compared to $191.6 million, with
a cost of 2.19%, for six-months ended March 31, 2006. Within the category of
interest-bearing deposits, the average balance of money market deposit accounts
and certificate of deposit accounts increased by $13.7 million and $15.1
million, respectively, while the average balance of savings and NOW accounts
declined by $30.2 million and $2.9 million, respectively. The decrease in
savings and NOW accounts was due to the relative attractiveness of and
transfers to certificate of deposit accounts, money market accounts and
alternative investments in the marketplace. The average balance of borrowings
increased to $57.6 million, with an average cost of 4.55%, for six-months ended
March 31, 2007, as compared to an average balance of $53.0 million, with an
average cost of 4.14%, for six-months ended March 31, 2006. The increase in
average borrowing from the FHLB has funded the decline in average balances of
interest-bearing deposits.
Net Interest Income: Net interest income decreased by $404 thousand, or
10.4%, for six-months ended March 31, 2007, to $3.5 million, as compared to
$3.9 million for six-months ended March 31, 2006. The decrease was primarily
attributed to the combination of an increase in interest expense of $885
thousand, offset, to a lesser extent by an increase in interest and dividend
income of $481 thousand. The Bank's net interest rate spread, which represents
the difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities, decreased by
0.34%, to 2.11% for six-months ended March 31, 2007 as compared to 2.45% for
six-months ending March 31, 2006.
Provision for Loan Losses: The Bank recorded a $60 thousand provision for
loan losses for six-months ended March 31, 2007 compared to $0 for six-months
ended March 31, 2006. The increase in the provision for loan losses is due to an
increase in the valuation allowance on commercial loans, as the balance
increased by $3.6 million to $39.0 million for six-months ended March 31, 2007,
as well as a slight increase in the allowance related to specific problem loans.
15
Total loans at March 31, 2007 were $208.4 million, $209.7 million at September
30, 2006 and $221.4 million at March 31, 2006. It is the Bank's policy to
provide valuation allowances for probable losses on loans based upon past loss
experience, current trends in the level of delinquent and specific problem
loans, loan concentrations to single borrowers, adverse situations that may
affect the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions in our market area. Accordingly, the
evaluation of the adequacy of the allowance for loan losses is not based
directly on the level of non-performing loans. As the Bank expands its
commercial lending activities, management believes that growth in the allowance
for loan losses may be likely. Additionally, while management believes it
continues to have excellent loan quality, the Bank recognizes that it is located
in a market and geographic area that is considered to be in the high technology
and financial services belt and, most likely, the Bank's allowance for loan loss
will reflect the relative health of these economic sectors. While management
believes it's current level of allowance for loan losses is adequate, there can
be no assurance that the allowance will be sufficient to cover loan losses or
that future adjustments to the allowance will not be necessary if economic
and/or other conditions differ substantially from the economic and other
conditions considered by management in evaluating the adequacy of the current
level of the allowance for loan losses.
Other Income: Other income consists primarily of fee income for customer
services, gains and losses from the sale of mortgages and the sale of
securities available for sale, and income from BOLI. Total other income
increased by $8 thousand, or 1.6%, to $495 thousand for six-months ended March
31, 2007, from $487 thousand for six-months ended March 31, 2006. During
six-months ended March 31, 2006, the Company sold fixed-rate mortgage loans,
with servicing retained by the Bank, and recognized a pre-tax loss on the sale
of $25 thousand. Miscellaneous income increased by $22 thousand, or 16.8% to
$153 thousand for six-months ended March 31, 2007 as compared to $131 thousand
for six-months ended March 31, 2006 primarily as a result of increases in the
cash surrender value on BOLI policies, income from the origination of
Massachusetts Housing Loans, and the dividend on the Bank Insurance Fund
Investment.. Customer service fees decreased by $43 thousand, or 11.3%, to $338
thousand for the six-months ended March 31, 2007 as compared to $381 thousand
for six-months ended March 31, 2006, primarily due to the timing of income from
the sale of non-deposit investment products and prepayment fees on commercial
loans received in 2006.
Operating Expenses: For six-months ended March 31, 2007, operating
expenses increased by $594 thousand, or 13.1%, to $5.1 million, from $4.5
million for six-months ended March 31, 2006. The primary reasons for the
increase in operating expenses were due to increases in salaries and employee
benefits and professional fees, offset, to a lesser extent by a decline in
general and administrative and marketing expenses. Salaries and employee
benefits increased by $563 thousand, or 23.5%, to $3.0 million for six-months
ended March 31, 2007 as compared to $2.4 million for six-months ended March 31,
2006 primarily as a result of a bonus payment to a senior executive and an
accelerated recognition of certain director benefit expenses. Professional fees
increased by $296 thousand, or 108.8%, to $568 thousand for six-months ended
March 31, 2007 as compared to $272 thousand for six-months ended March 31, 2006,
due to legal and other expenses related to the pending merger with Assabet. As a
result of a higher volume of services provided, data processing expenses
increased by $9 thousand, or 2.4%, to $386 thousand for six-months ended March
31, 2007 as compared to $377 thousand for six-month ended March 31, 2006. Other
general and administrative expenses declined by $219 thousand, or 26.7%, to $600
thousand for six-months ended March 31, 2007, primarily due to settlement
expenses relating to a civil action filed against the Bank during the six-months
ended March 31, 2006. Occupancy and equipment expenses declined by $48 thousand,
or 8.0%, to $553 thousand for six-months ended March 31, 2007 as compared to
$601 thousand for six-months ended March 31, 2006, due to a reduction in
maintenance expenses coupled with a decline in depreciation expense on
equipment, still in operation, reaching their estimated useful life.
16
Income Taxes: Loss before benefit for income taxes increased by $1.1
million, to a loss of $1.2 million for six-months ended March 31, 2007 as
compared to a loss of $183 thousand for six-months ended March 31, 2006.
Primarily a result of this increased loss, the benefit for income taxes
increased by $186 thousand, to a benefit of $259 thousand, for six-months ended
March 31, 2007 as compared to a benefit of $73 thousand for six-months ended
March 31, 2006. The effective income tax rate was (21.0%) and (39.9%) for
six-months ended March 31, 2007 and six-months ended March 31, 2006,
respectively. The lower effective tax rate was attributable to the loss before
income taxes for six-months ended March 31, 2007, as compared to March 31,
2006, in addition to the Bank's utilization of a wholly-owned security
investment subsidiary, and favorable tax treatment from the increase in the
cash surrender value of BOLI.
Liquidity and Capital Resources
The term "liquidity" refers to the Bank's ability to generate adequate
amounts of cash to fund loan originations, deposit withdrawals and operating
expenses. The Bank's primary sources of funds are deposits, scheduled
amortization and prepayments of loan principal and mortgage-backed securities,
maturities and calls of investment securities and funds provided by the Bank's
operations. The Bank also borrows money from time to time from the FHLB as part
of its management of interest rate risk and to even out cyclical patterns of
loan demand.
Loan repayments and maturing securities are a relatively predictable
source of funds. However, deposit flows, calls of securities and prepayments of
loans and mortgage-backed securities are strongly influenced by interest rates,
general and local economic conditions and competition in the marketplace. These
factors reduce the predictability of the timing of these sources of funds.
The Bank's primary investing activities are the origination of one-to
four-family real estate and other loans and the purchase of securities. During
six-months ended March 31, 2007, the Bank originated loans of $16.4 million and
experienced principal repayments on loans of $15.2 million. The Bank purchased
securities of $5.0 million during six-months ended March 31, 2007. Principal
payments on mortgage-backed securities provided an additional $2.0 million and
there were $13.9 million of securities that matured and called during
six-months ended March 31, 2007. During six-months ended March 31, 2007 the
Company experienced a net decrease in deposits of $379 thousand. While savings
account balances declined over the recent six months ended March 31, 2007 the
Bank experienced an increase in money market accounts and certificates of
deposit, as customers moved their funds into relatively higher earning deposit
accounts.
Certificate of deposit accounts scheduled to mature within one year were
$76.0 million at March 31, 2007. Based on the Bank's historical deposit
retention experience and current pricing strategy and enhanced product
offerings, the Bank anticipates that a significant portion of these
certificates of deposit will remain with the Bank. The Bank has certificate of
deposit programs with flexible and competitive terms which it believes enhances
deposit retention and attracts new depositors as well.
The Bank is committed to maintaining a strong liquidity position;
therefore, it monitors its liquidity position on a daily basis. The Bank also
periodically reviews liquidity information prepared by the Depositors Insurance
Fund, the Federal Deposit Insurance Corporation and other available reports,
which compare the Bank's liquidity with banks in the state and in its peer
group. The Bank anticipates that it will have sufficient funds to meet its
current funding commitments. At March 31, 2007, the Bank had $53.5 million in
outstanding borrowing from the FHLB and, based upon estimated eligible
collateral that could be pledged with the FHLB, the Bank had additional
borrowing capacity of $45.4 million at March 31, 2007.
At March 31, 2007, the Company's capital to assets ratio was 9.41% and it
exceeded applicable regulatory capital requirements. Further, it does not have
any balloon or other payments due on any
17
long-term obligations or any off-balance sheet items other than the commitments
and unused lines of credit.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.
Item 3. Controls and Procedures.
Management, including the Company's President and Chief Executive Officer
and Senior Vice President, Chief Financial Officer, Treasurer and Clerk, has
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this report. Based upon that evaluation, the Company's
President and Chief Executive Officer and Senior Vice President, Chief
Financial Officer, Treasurer and Clerk concluded that the disclosure controls
and procedures were effective to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange Act
(i) is recorded, processed, summarized and reported as and when required, and
(ii) accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosures.
There have been no changes in the Company's internal control over
financial reporting identified in connection with the evaluation that occurred
during the Company's last fiscal quarter that have materially affected, or that
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the six-months ended March 31, 2007, the Company did not repurchase any
of its common stock. In September 2000, the Massachusetts Division of Banks
approved a share repurchase program which authorized the repurchase up to 79,069
shares. To, date no shares have been repurchased under this program.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits
Exhibit 31.1: Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 32.1: Section 1350 Certifications
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Westborough Financial Services, Inc.
Date: May 15, 2007 By: /s/ Joseph F. MacDonough
-------------------------------------
President and Chief Executive Officer
Date: May 15, 2007 By: /s/ John L. Casagrande
-------------------------------------
Senior Vice-President, Chief
Financial Officer, Treasurer
and Clerk
19